The Year's Biggest Ideas in Economics

Continuing a tradition of mine, here is a shamelessly subjective list of the most noteworthy research which came out in the last year:

Putting a new spin on the idea of sticky wages, Lena Edlund, Joseph Engelberg, and Christopher A. Parsons point out that the earnings of high-end prostitutesdon't fall as fast as the decline in the sex-worker's physical attractiveness.

Before there was Superfreakonomics, before there was even Freakonomics, there was Steve Levitt and John Donohue's (in)famous abortion paper claiming that a major cause of declining crime rates was the legalization of abortion. Reviewing follow-up research 10 years after Levitt and Donohue's original paper, Theodore Joyce finds little support for the abortion-crime link.

With a whole of host of behavioral economists in the Obama administration, Bruce Ian Carlin, Simon Gervais, and Gustavo Manso have a timely paper on the limits of nudge-ocracy.

Another set of papers sheds further light on the gender gap in achievement in the hard sciences. Roland Fryer and Levitt show that "girls do not lag boys in math in countries with same-sex schooling." Scott Carrell, Marianne Page, and James West show that a professor's gender has a "powerful effect" on the achievement of women.

Annamaria Lusardi (and various coauthors) wrote three different -- and mostly depressing -- papers detailing the sorry state of financial literacy. In the first, she finds that "only about one-third of the population seems to comprehend interest compounding or the workings of credit cards." And in the next, she notes that retirees "lack even a rudimentary understanding of stock and bond prices, risk diversification, portfolio choice, and investment fees." But there is reason for some hope since, as Lusardi writes in the third paper: "[T]hose with more advanced financial knowledge are those more likely to be retirement-ready."

But financial know-how is no panacea in general. This theoretical work by Sanjeev Arora, Boaz Barak, Markus Brunnermeier, and Rong Ge claims that it's possible to construct a financial derivative with an undetectable booby trap.

Charles Calomiris, Stanley D. Longhofer, and William Miles say there is no such thing as a housing wealth effect.

And finally, with distrust of the market system at understandably elevated levels right now, it's worth pointing out that, as Hayek argued, the development of markets was likely essential in producing critical parts of our system of morality. Along these lines, Patrick Francois, Thomas Fujiwara, and Tanguy van Ypersele show that U.S. states which were quicker in deregulating their banking systems -- and presumably increasing competition -- also experienced greater levels of trust.